The Response to the Report of the Defence Procurement and ... · (DMO) and the effectiveness of...

DPS: JAN024/09

THE RESPONSE TO THE REPORT OF THE DEFENCE PROCUREMENT AND

SUSTAINMENT REVIEW

THE MORTIMER

REVIEW

www.defence.gov.au

The Response to the Report of the Defence Procurement and Sustainment Review

THE RESPONSE TO THE REPORT OF THE DEFENCE PROCUREMENT AND SUSTAINMENT REVIEW THE MORTIMER REVIEW

The Mortimer Report 1


2 The Mortimer Report


FOREWORD In May 2008, the Government commissioned an independent review of the Defence Materiel Organisation

(DMO) and the effectiveness of Australia’s defence procurement systems, led by Mr David Mortimer AO.

In response to the Defence Procurement and Sustainment Review (the Mortimer Review), the Government

has endorsed a plan that will change the way Defence develops, acquires and sustains military capability.

The DMO will launch a radical change program to become more business-like in supporting its Defence

customer.

The Government’s response highlights the scale of change needed to improve procurement. As the Mortimer

review pointed out, these changes build on a strong record of reform since the 2003 Kinnaird Review.

Four key principles underpin our approach. First, the Defence Organisation must become more accountable

to Government and more transparent in managing the billions of dollars invested in building military

capabilities.

Second, DMO must strengthen its capacity to give Government independent advice on the cost, risk,

schedule and acquisition strategies for major capital equipment.

Third, DMO needs a stronger business-like culture to deliver projects on-time, on-budget and to Defence’s

requirements.

Fourth, the already strong relationship between Defence and DMO must be further strengthened. The key

priority is meeting Defence’s military capability needs and, by achieving that goal, keeping Australia secure.

The 20 point plan set out here shows the steps that Defence and DMO will take to deliver on these

principles. The plan presents the high points of a reform agenda that is captured in more detail in the

Government’s response to the Mortimer Review’s 46 recommendations.

I would like to acknowledge the considerable efforts of the Hon Greg Combet, AM, MP, in his previous

capacity of Parliamentary Secretary for Defence Procurement, in contributing to this plan.

Joel Fitzgibbon

Minister for Defence





CONTENTS SECTION ONE The plan to make Defence equipment acquisition and sustainment more business like. 7

SECTION TWO Response to the Defence Procurement and Sustainment Review - The Mortimer Review. 15

SECTION THREE The Implementation of Procurement Reform. 45





SECTION 1

STRENGTHENING THE DEFENCE ORGANISATION’S ACCOUNTABILITY AND TRANSPARENCY 1. DIRECT APPROPRIATION OF SERVICE FEE TO THE DEFENCE MATERIEL

ORGANISATION (DMO)

DMO’s total service fee will be directly appropriated to the DMO. This will cover Australian Public Service

(APS) staff, military staff and administrative costs and give CEO DMO the flexibility to manage and control the

DMO budget.

Further study will be given on the best way to handle risk if Defence is not able to supply the agreed number

of ADF personnel to work in DMO.

Cost systems that allow greater price transparency will in time allow direct appropriation for so-called “free

of charge” items currently provided to DMO by Defence.

2. DIRECT APPROPRIATION OF MAJOR CAPITAL ACQUISITION FUNDING TO DMO

Further work will be done by Defence and DMO to develop a practical plan for direct appropriation to DMO

for major capital acquisitions. A number of budgeting, financial reporting, and governance issues will need to

be resolved in order to develop such a model. The model must also ensure that savings and efficiencies are

reinvested in Defence via the Defence Strategic Investment Reserve.

The model will be based on the following principles:

• AdirectappropriationtoDMOfortheacquisitioncostoftheequipmentplusDMO’sshareof

approved project contingency.

• TheappropriationforotherFundamentalInputstoCapability(FIC)(suchassustainmentcosts,

support from the Defence Science and Technology Organisation (DSTO) and estate costs) will

remain with Defence.

• ContingencyrelatingtoprojectelementsnottheresponsibilityoftheDMOwillremainwith

Defence.

Government will decide whether to implement direct appropriation of major capital equipment funding to

DMO after reviewing a report on the practicalities of implementation. Direct appropriation could occur in

2010-11 following consideration of the practicalities in the budget development process.



3. A CONSOLIDATED SET OF CLEAR BUDGET FIGURES

An essential part of being accountable to Government and transparent in the way we do business is that

Defence and DMO should agree a consolidated set of budget figures showing the combined financial

situation of both entities. This will give Government a clear and complete picture of the complex financial

interactions between DMO and Defence. Defence’s Chief Financial Officer will work with DMO to produce a

consolidated budget as part of the annual budget cycle.

4. CLEAR PROJECT DIRECTIVES

The scope, cost and schedule of Defence equipment acquisitions will be better defined in the business

cases considered by Ministers (or the National Security Committee of Cabinet - NSC) through the Two Pass

process. There will be greater consistency and tighter control of changes between Ministerial approvals at

the highest level, and the management of project implementation on a day to day basis. This will ensure that

key project characteristics and outcomes are identified at the outset, and carried through to completion, or

reviewed and changed if necessary through a disciplined process involving Government.

To assist in developing greater clarity in the capability planning process a Project Directive, based on the

project approval decisions made by Government, will be issued immediately following Government approval

at Second Pass. A draft Directive will be included in the submission to Government. The Project Directive will

provide the top level direction from the Chief of the Defence Force to the Capability Manager to introduce

the full operational level capability into service by the date agreed upon by Government. It will articulate the

respective roles of the Defence Groups, the Services and DMO in delivering their elements of the project.

DMO, supported by Defence Groups and Services, will have formal responsibility and accountability for

developing estimates, information and advice relating to the cost, schedule and risk of equipment acquisition

upon entry of a capability into the Defence Capability Plan and for developing the acquisition strategy.

The Chief Defence Scientist’s responsibility for providing independent advice on technical risk remains

unchanged.

Defence, with the assistance of the DMO, and drawing on the Capability Managers’ expertise will draft

project directives, promulgating the Cabinet and Ministerial approvals. These will inform the development

of all relevant capability and project management documents and plans – with the directive being the

authoritative document.

Proposed changes to these directives that alter specific scope, cost or schedule parameters agreed by

Ministers or NSC will need to be considered by Government. Changes within the project parameters agreed

by Government can be considered by Defence if there is no adverse change to the risk profile of the project

or the whole of life costs. Specific arrangements for consideration and approval of project changes will be

developed by Defence in consultation with the Department of the Prime Minister and Cabinet, the Treasury,

and the Department of Finance and Deregulation. The Minister for Defence and the Minister for Finance and

Deregulation will approve the thresholds for consideration of project changes, following consultation with the



Prime Minister and the Treasurer.

5. CLARIFY THE MATERIEL ACQUISITION AGREEMENTS (MAA)

MAAs will be developed consistent with the approval decisions made by Government. They will define more

specifically the responsibilities and deliverables between DMO, Capability Development Group and the

relevant Capability Managers. They will include details on the deliverables in terms of capability, supplies,

specifications, cost, schedule and customer furnished supplies.

MAAs will also clarify when the responsibility for the new capability passes to the Capability Manager from

DMO in line with Government decisions.

6. PROVIDE CLEARER ADVICE TO INDUSTRY

DMO, supported by CDG, will consult with Industry to find ways to improve advice on cost estimates to

industry in the Defence Capability Plan. It is important to strike a balance between the Government’s

requirements for transparency with the need to protect Defence and the Commonwealth’s commercial

interests in contract negotiation.

7. PLAN FOR MORE OFF-THE-SHELF (OTS) PROCUREMENT

As has been the case since the 2003 Kinnaird Review1, Off-the-shelf (OTS) options will be considered as

an option for all procurements. Defence will provide Government with clear information on the costs and

benefits of OTS options for all procurements.

Defence Procurement Review 2003 [the ‘Kinnaird Review’]. In addition to military off the shelf items, Defence and DMO acquire many ‘off the shelf’ items

that are not specifically military, such as clothing.

IMPROVING DMO’S INDEPENDENT ADVICE AND ACCOUNTABILITY TO GOVERNMENT 8. STRENGTHEN THE CAPABILITY DEVELOPMENT PROCESS

Reforms to the Capability Development process will provide Government with more reliable information on

which to base judgements and a more efficient and effective capability development process. This will be

achieved by:

• ThedevelopmentofregularDefenceWhitepapersandanoverhauledandstrengthenedDefence

Planning Guidance process to ensure tighter alignment between strategic guidance, capability

decisions and resources.


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• ClarifyingtherolesandresponsibilitiesofeachpartoftheDefenceOrganisationincapability

development terms, with the Capability Development Group (CDG) remaining the coordinating

authority for developing submissions for Government.

• Betterdefiningtherolesandmembershipsofkeycapabilitycommittees.

• ConfirmingthatDMOisresponsibleandaccountablefordevelopingmilitaryequipmentcostsand

schedule estimates and risk analysis and developing and implementing an acquisition strategy.

DMO will also be responsible for analysing industry’s capacity to deliver the required capability.

• ClarifyingtherolesofeachGroupandServiceindevelopingFundamentalInputstoCapability

(FIC).

• StrengtheningtherolesofCapabilityManagersincoordinationandintegrationofallFIC.

• EstablishingbetterplanningconnectionsbetweenCapabilityDevelopmentandkeyenabling

Groups such as the Defence Science and Technology Organisation and the Chief Information

Officer Group.

• Ensuringthatcapabilityandcommercialadvicearedevelopedintandemthroughtheproject.

• EnsuringearlyconsultationwiththeDepartmentofFinanceandDeregulationonoptions,cost

estimates and project risks.

9. STRENGTHEN THE LINKS BETWEEN STRATEGY AND CAPABILITY DEVELOPMENT

Defence will implement a strategic planning process that institutionalises the links between strategic

guidance, force structure, capability priorities and resource strategies that have been developed during the

WhitePaperprocess.ThisprocessaccordswithGovernment’sdesireformoreregularWhitePapers,and

ensures that Defence’s capability and enterprise activities remain strategy-led.

Of particular note, the future development of the ADF will be driven by an improved force structure and

capability development process within Defence. The central feature of this will be stronger linkages between

strategicguidance,forcedevelopmentandcapabilitydecisions.RegularWhitePapers,andthreekey

planning documents – the Defence Planning Guidance, the Defence Capability Strategy, and the Defence

Capability Plan will be key to this new system.

10. STRENGTHEN DMO’S ROLE AT THE NATIONAL SECURITY COMMITTEE (NSC) OF CABINET

WewillensurethatDMOpresentsitsindependentadviceoncost,scheduleandriskofequipmentacquisition

in NSC submissions and presents an acquisition strategy within the submission. CEO DMO will advise on

cost, risk, schedule and acquisition strategy for major capability submissions.



BUILD A STRONGER BUSINESS-LIKE CULTURE IN DMO 11. MORE FLEXIBLE STAFF MANAGEMENT

The Secretary of Defence has devolved a wide range of Human Resource-related powers and functions

to the CEO DMO, who may exercise these powers in his own right. These powers provide a high degree

of autonomy to enable CEO DMO to govern DMO to achieve identified business outcomes and to provide

flexibility on employment matters.

The Secretary of Defence has a stewardship responsibility as the Defence Portfolio Head to ensure that APS

Values and the Public Service Act are complied with across the portfolio. In this respect the Secretary will

be kept informed of SES employment decisions and receive from CEO DMO an annual stewardship report

covering the DMO workforce. This in no way diminishes CEO DMO’s authority to exercise decision making

within the DMO workforce.

12. BETTER WAYS TO ATTRACT THE RIGHT STAFF

DMO will seek to employ more commercially experienced and skilled personnel – especially at the SES level.

CEO DMO will have authority and responsibility for managing DMO’s budget and staff, and will have the

flexibility, where necessary, to pay above average public service wages to attract appropriate people.

13. BETTER WAYS TO MANAGE STAFF NUMBERS

Although it is a matter for the Government to decide, the Secretary and CDF have indicated to Government

that they support DMO moving to a total labour cost model rather than work within restrictions on staff

numbers. This will give CEO DMO the flexibility within his budget – within the limits set by government – to

recruit as necessary to meet requirements for delivering capital equipment projects and sustainment services

to Defence.

14. BUILDING A MORE BUSINESS-LIKE CULTURE

CEO DMO will write a plan for building a more business-like and commercial culture in DMO. The plan will:

• Setquantifiablekeyperformanceindicatorsandmeasuresofsuccess.

• Identifytheindividualswhowillbeaccountablefordeliveringtheculturalchangeplan.

• SpecifynecessarystructuralchangeswithinDMO.

• Setappropriatetime-framesformeasuringprogress.

• DevelopanappropriatereportingframeworkforMinistersandtheParliament.

• Bereleasedpubliclybymid-2009.



15. CREATE A GENERAL MANAGER, COMMERCIAL POSITION

DMOwillrecruitaSeniorExecutiveServiceBandThreeGeneralManager–Commercial,whowillhave

extensive private sector experience. That person will support the CEO DMO to bring about the necessary

cultural change in the DMO. They would also play a major role in the development of the acquisition

strategies for major projects and ensuring sound commercial advice is provided throughout the capability

process.

ENHANCING THE DMO-DEFENCE RELATIONSHIP 16. DEVELOP A DMO – DEFENCE CHARTER

A Charter will be jointly developed between DMO and Defence to clarify their respective authorities and

responsibilities and to ensure that DMO’s key priority is to provide Defence with its operational and military

capability requirements as agreed by Government, thereby helping to keep Australia secure. In practice this

will amount to an updating of the Defence DMO Memorandum of Arrangements established in 2005 and

its suite of underpinning agreements including agreements on Materiel Acquisition; Materiel Sustainment;

DefenceServices;SharedServicesandontheMilitaryWorkforce.

17. WRITE A PERSONAL CHARTER FOR CEO DMO

A Charter (which supplements the Ministerial Directive) outlining the personal responsibilities for CEO DMO

and his direct accountabilities to the Secretary of Defence and the Chief of Defence Force will be drawn

up and approved by the Minister for Defence. This will set clear authorities and accountabilities and set

benchmarks for performance both in terms of DMO’s core business and more specifically for CEO DMO’s

delivery of the plan to make DMO more business-like.

18. STRENGTHEN THE ROLE OF THE CAPABILITY MANAGERS

The Capability Managers are the Chiefs of Navy, Army and Air Force, the Vice Chief of Defence Force

(for joint capability projects) and the Deputy Secretary Intelligence, Security and International Policy (for

selected Intelligence, Surveillance and reconnaissance projects) and the Chief Information Officer for certain

Information and Communications Technology (ICT) projects2. They play a critical role in ensuring that all

necessary inputs required to build a capability are brought together. The roles of the capability managers

ICT is an important sub-set of Defence capability development. In broad terms embedded communications systems that form an integral part of

platforms or sensor systems are part of the capability development and acquisition processes described in this paper. Other forms of ICT including those

that support Defence non-Specialist Military Equipment military and administrative activities are considered in the Defence White Paper ICT Companion

Review. That review will propose different capability development and acquisition methodologies for those systems, not least to take into account the

very rapid technological evolution of ICT.


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need to be further clarified and better articulated. This will be done through the improvements to the

capability development process outlined at initiative number 7.

MoreregularWhitePapersandimprovedDefenceplanningprocesseswillfurtherstrengthentheroleofthe

CapabilityManagers.ThenewDefenceBudgetManagementModelwillprovideseniorleaderswithgreater

authority to manage their budgets and non-financial inputs. Capability Managers will agree appropriate

service support levels and transfer funds accordingly to the relevant internal Defence provider.

A key concern is to resolve the potential conflict between the responsibility of the DMO to deliver approved

equipment, and the Capability Managers to advise on whether approved equipment is fit for operational use

at the time it is delivered. It is essential that any change in circumstances which indicates that approved

equipment might no longer be judged suitable for operational use, or can not deliver value for money, is

advisedtoGovernmentattheearliestopportunity.Whethertocontinuewithaprojectinthesecircumstances

should be a decision for Government. Capability Managers must include whole-of-life implications and

independent advice from the CEO DMO on the cost, risk and schedule implications for projects in their advice

to Government.

19. EXPLORE CREATING A PROFESSIONAL CAREER STREAM FOR ACQUISITION SPECIALISTS

To strengthen the ADF’s skills in the areas of acquisition, Defence and DMO will explore the possibility

of creating a professional career stream for acquisition specialists. Like the Corps in military service (for

example, Infantry, Armour and Artillery) this professional career stream could provide a more attractive

career management framework for personnel interested in specialising in this area. This is a complex matter

that engages the interests of the Services and it will take some time to develop a proposal for Government

consideration.

20. REVITALISE THE DEFENCE PROCUREMENT ADVISORY BOARD (DPAB)

TheDPABhasbeenanexcellentsourceofadvicetoDMOsinceitsinceptionin2003.Ithasprovideda

useful mechanism for DMO and Defence to access industry expertise and consult with Central Agencies.

Defencewillembarkonabroadprogramofstrategicreformin2009,andtheestablishmentofaDefence

StrategicReformAdvisoryBoardisproposed.Ifagreed,thisBoardwouldbechairedbyapersonfromthe

private sector with the appropriate skills and experience to advise on a significant reform program in a

largeandcomplexorganisation.TheBoardwouldcompriseanappropriatebalanceofinternalandexternal

members, including the Secretaries of the Department of the Prime Minister and Cabinet, the Treasury, the

Department of Finance and Deregulation; and the Secretary of Defence, the Chief of the Defence Force

andtheCEODMO.Toensurethatstrategicreformispursuedonawholeofportfoliobasis,theBoardwill

encompassthefunctionsoftheDPABasdescribedintheMortimerReview.





SECTION 2

RESPONSE TO THE REPORT OF THE DEFENCE PROCUREMENT AND SUSTAINMENT REVIEW - THE MORTIMER REVIEW RECOMMENDATIONS AGREED: 42

AGREED IN PART: 3

2.2 Subordinate Committee of the NSC 4.7 DMO-Defence functional split on warehousing 5.4 Direct funding to DMO for major capital equipment

NOT AGREED: 1

5.1 Executive Agency Status for DMO



The Government’s response to the Mortimer Review (the Review) is based on the principles of clarifying

linesofaccountabilityandenhancingthetransparencyofcapitalequipmentprocurementdecisions.We

will strengthen the capacity of the Chief Executive Officer of DMO to provide Government with clearly and

separately identified advice on cost, risk, schedule and acquisition strategies for major capital equipment.

Wewilldevelopamorebusiness-likecultureinDMObyimplementingamajorprogramoforganisational

and cultural change. There will also be substantial change within Defence, most particularly in the Capability

DevelopmentGroup,thatwillimprovethewaytheDefenceOrganisationdoesbusiness.Wewillalsowork

to further strengthen the close relationship that exists between DMO and Defence, in particular codifying

the authorities, roles and responsibilities of the Defence Capability Managers, the DMO and other Defence

stakeholders throughout the procurement process.

DMO is a vital input to Defence, without which we would not have the military capabilities necessary to

defend Australia and its national interests. An essential feature of DMO’s more business-like approach will be

an unwavering focus on delivering its customer’s requirements, the customer in this case being the Defence

Organisation, and through it the Government and people of Australia.

This section sets out the Government’s detailed responses to the 46 recommendations of the Mortimer

Review. It should be read in conjunction with the previous section, which sets out the key elements of the

reform program for DMO, the capability development areas in Defence and for enhancing the DMO-Defence

relationship as a whole.



RECOMMENDATION 1.1 Defence should prepare an annual submission detailing current and future capability gaps and the priority

for their remediation for Government consideration and approval. This submission would be developed by the

Capability Development Group.

AGREED

• Defencewillimplementastrategicplanningprocessthatinstitutionalisesthelinksbetween

strategic guidance, force structure, capability priorities and funding that have been developed

duringtheWhitePaperprocess.ThisprocessaccordswithGovernment’sdesireformoreregular

WhitePapers,andensuresthatDefence’scapabilityandenterpriseactivitiesremainstrategy-

led.

• TheclassifiedDefencePlanningGuidancewillprovideGovernment-endorseddirectionon

strategy, force structure and investment priorities on an annual basis. This direction will drive

concurrency planning, preparedness planning and investment in both capability and enterprise

enablers that will ensure Defence maintains the ability to meet Government’s strategic needs

for the ADF within agreed funding levels. This strategic planning process will be led by Strategic

Policy Division, supported by the Capability Development Group and with the close engagement

of other organisational elements such as the VCDF Group. The Defence Capability Strategy and

the Defence Capability Plan will also be central elements of this new system and overseen by the

Government in a way that has not previously occurred.

• WebelievethataGovernment-endorsed,strategy-ledandforcestructurefocuseddecision

making process, with clear and unambiguous advice to the enterprise about its investment and

capability management strategies will address the Review’s observation that “there are always

more capability gaps to be filled than available resources”. Any discussion of capability gaps in

Government public documents will need to pay close regard to the proper handling of classified

information.



RECOMMENDATION 1.2 Defence should increase the rigour with which projects are assessed for entry into the Defence Capability

Plan (DCP). Capability Development Group (CDG) should develop the relevant information for a project’s

entry into the DCP and it should focus on achieving more disciplined cost, schedule and risk information for

a project’s entry. The information provided to Government should allow an informed decision on a project’s

suitability for entering the DCP.

AGREED

• Morerigourmustbeappliedtocost,scheduleandriskinformationrelatingtoproposalsentering

theDCP.WenotetheReview’scommentthatDefencehasapplied“significanteffort”toimprove

therigourunderpinningtheDCPandthatthereisaneedtotakethisworkfurther.Wewillbuild

on this work following Mr Mortimer’s recommendation.

• ProjectsentertheDCPuptotenyearsaheadofapproval.Thecostprovisionmadeatentryis

based on the best information available at the time and based on exemplar technologies and

similar capabilities. Projects are developed and refined over time. In that process a range of

options are developed and explored, new approaches may become feasible, and scope and

costs are refined. Sometimes better ways of achieving the capability emerge or the priority may

change.Withinthiscontextweassessthatwecanimproveourearlyscopingofcost,schedule

and risk information on projects to be included in the DCP. Part of this process will be early and

sustained engagement with industry.

• ThereisaparticularneedforaccuracyinDefenceCapabilityPlancostestimatesoverthe

forward estimates period. To improve accuracy of the Commonwealth budget estimates, Defence

will revise project cost estimates as better information becomes available and, at the least, once

a project enters the forward estimates period.

• TheCDGwillleadonthistask,supportedbyDMOandotherGroupswhereappropriate.Defence

will establish an internal “tiger” team to address how to improve performance in this area,

withinitialresultstobereportedtoGovernmentbytheendofthesecondquarter2009.This

process will require closer and earlier engagement of DMO and the Department of Finance

and Deregulation in the capability development area, including establishing better quality cost

estimations.

• Defence’sStrategicPolicyDivision,theDefenceScienceandTechnologyOrganisation(DSTO)

and the Defence Capability Managers in the form of the Service Chiefs, Vice Chief of Defence

Force (on joint capabilities and on the impact of net personnel and operating costs), Deputy

Secretary for Intelligence, Security and International Policy and, where appropriate, the Chief

Information Officer (CIO) will also need to be closely involved in a more rigorous development of

the DCP.



RECOMMENDATION 1.3 The Defence Chief Finance Officer (CFO) should assure the affordability of the Defence Capability Plan,

including its impact on future personnel and operating costs, as part of the annual Defence budget

considerations. To achieve this, the Defence Chief Finance Officer would audit the cost and schedule

estimations within the Defence Capability Plan as developed by Capability Development Group to ensure they

are as practical and as accurate as possible.

AGREED

• Weagreewiththeintentofthisrecommendation.AssuringtheaffordabilityoftheDefence

Capability Plan is a task that relies on cost and schedule estimation skills of the DMO and CDG

and others. In isolation the CFO is not in a position to make professional judgements about these

matters, but can collate the contributions of the Groups and Services.

• WeproposethatastatementtobemadeineachDCP,developedbytheCFODefenceandjointly

signed by the CEO DMO, Chief Capability Development Group (CCDG) and CFO, which agrees

that the accumulation of projects (and their future operating costs) in the DCP are affordable

and achievable within forecast budget guidance given by Government. Such a statement would

demonstrate that appropriate oversight has been provided to the DCP by all the relevant areas

in Defence. This statement would also need to outline potential sources of change to capability

costs.

• CFO,CEODMOandCCDGwilldevelopastatementonDCPaffordabilitytobeincorporatedinto

thenextpublicDCPin2009.

• AcrucialpartofthisprocesswillbetoensurethatDefenceandDMOareabletopresenta

single, combined set of budget figures annually, notwithstanding that there will also be separate

appropriations for some parts of the DMO budget. A consolidated set of budget figures will add

greater transparency to the total defence budget for Government planning purposes.

• OurfocuswillbeonprovidingGovernmentwithinformationforbudgetdecisionmakingbasedon

a consolidated position in addition to the current agency based data. The lead for this will be with

CFO Defence, in consultation with CFO DMO.



RECOMMENDATION 1.4 The public Defence Capability Plan should contain sufficient information on project scope and timing to

enable industry to develop strategic business plans, and the explicit cost bands presently disclosed should

be replaced by a measure relative to the DMO Acquisition Category framework.

AGREED

• CEODMOandCCDGwillworkonapplyingtheDMOAcquisitionCategoryframework

methodologytothenextpublicversionoftheDCPin2009.Wenotethattherewillalwaysbea

tension between the need for transparency to assist business to plan for projects and the need

for Defence to maintain a capacity to achieve good contract outcomes for the Commonwealth.

Wewillconsultwithdefenceindustrytohelpidentifythebestwaytoprovideinformationon

projects without undermining the Commonwealth’s capacity to pursue value for money.

RECOMMENDATION 2.1 Government approval of major Defence projects should occur through a tailored application of the two-pass

process. For simple acquisitions where project definition is complete, Government may decide that Defence

Capability Plan entry satisfies first pass requirements. If the complexity or cost of a project is high or project

definition is uncertain, a minimum of two passes should be employed.

AGREED

• Wewilldevelopappropriatemeasurestoensurethatthetwo-passprocessisusedforcomplex

and costly procurement tasks and explore options to speed decision-making on less complex

procurements. It should be noted though, that the two-pass process (indeed, multi-pass in

some very complex cases) has been a successful approach for Government consideration of

acquisition projects.

• Theextanttwo-passapprovalprocessalreadyallowsforcombinedFirstandSecondPass

approval for less complex projects and for more than two considerations where projects

are particularly complex. In addition, Cabinet rules allow for projects to be approved without

discussion, or under the ‘Ten Day Rule’, where there are no contentious issues. The move

towards more off-the-shelf procurements should reduce overall the number of more complex

projects.

• Nevertheless,manydefenceprojectsareinherentlycomplexandcostlyandweanticipatethat

the two-pass approach will continue to be applied in these cases.



RECOMMENDATION 2.2 To expedite the capability development process and allow the National Security Committee to focus on major

issues, a subordinate subcommittee should be created to handle minor and less complex defence acquisition

matters.

AGREED IN PART

• Weagreewiththeintenttoreducetheheavywork-loadoftheNationalSecurityCommittee

(NSC) of Cabinet. However, creating a Subcommittee of the NSC may raise the workload of the

Committee by requiring three Ministers (Defence, Treasurer, Finance and Deregulation) to attend

both a sub-committee and a full NSC meeting to deal with less complex procurement items.

• AnalternativeapproachisfortheSecretariesCommitteeonNationalSecurity(SCNS)toadvise

Ministers where there is departmental agreement on less complex procurement proposals.

WherethereisdepartmentalagreementtheseitemscouldproceedtoNSCforagreement

without discussion unless Ministers specifically raise issues for consideration. Alternatively, less

complex procurement matters could be agreed by out-of-session correspondence between

Ministers. Either approach will streamline the NSC workload. Options to streamline current

processes will need to be discussed with the Department of Prime Minister and Cabinet.

• FollowinggovernmentagreementwewillliftthecostthresholdsformatterstobebroughttoTwo

Ministers and to the NSC. To reduce the Committee’s workload, we propose to lift the Minister for

Defence’s threshold for approving projects from $8 million to $20 million and for Two-Minister

approval to be accepted for projects costed at between $20 million to $100 million (currently the

range for two-Minister agreed projects is $8 million to $50 million). In the case of these projects

either Minister could request that NSC consider a project if necessary. The threshold for projects

to come to NSC would be raised from $50 million to $100 million. These thresholds will be

periodically reviewed to ensure their value is not significantly eroded.

• ThereviewproposedthattheParliamentarySecretaryforDefenceProcurementmightattenda

sub-committee of the NSC. This Parliamentary Secretary position was abolished in late February

2009.AttendanceofrepresentativesotherthantheMinisterforDefenceatNSCisamatter

in the first instance for the Minister for Defence to consult with the Prime Minister, following

paragraph 3.18 of the Cabinet Handbook (Fifth Edition), which says that “…parliamentary

secretaries would generally only be co-opted, with the Prime Minister’s approval, for matters of

particular relevance to their responsibilities.”3

3 The Cabinet Handbook can be downloaded at: http://www.pmc.gov.au/guidelines/index.cfm



RECOMMENDATION 2.3 Any decisions to move beyond the requirements of an off-the-shelf solution must be based on a rigorous

cost-benefit analysis of the additional capability sought against the cost and risk of doing so. This analysis

must be clearly communicated to Government so that it is informed for decision-making purposes.

AGREED

• ThereiswideagreementthatreducingcostandriskformajorDefenceequipmentacquisitions

involves procuring equipment that is as “off-the-shelf” as possible from existing production lines.

This should be an important first step in any decision to acquire a defence capability. As the

Review makes clear, there will be many occasions where modifications are required to military

equipment acquired off-the-shelf in order to, for example, meet Australian regulations and to

make the equipment interoperable with the rest of the ADF and with our allies. Interoperability

modifications, often based on the work of the DSTO provide a critical edge in terms of Australian

military capability. However, we need to pursue rigorous steps to ensure that off-the-shelf

solutions are explored and only essential modifications are agreed.

• Itshouldbenotedthat,inmanycases,anoff-the-shelfdefencecapabilityacquisitionalsoentails

acquisition from overseas. Pursuing an off-the-shelf approach will certainly produce cost and

time efficiencies, though this needs to be balanced against the Government’s intent to support

Australian industry, Defence’s need for a strong supply chain, and against a continuing need to

ensure that equipment purchased meets Defence’s operational needs.

• CCDGwillensurethatoff-the-shelfsolutionsareconsideredasanessentialearlystepinany

capability development proposal and that cost-benefit analysis of OTS options are considered by

government.

RECOMMENDATION 2.4 Prior to a project’s entry into the Defence Capability Plan, Capability Development Group should prepare

a capability submission that addresses the capability required along with the initial data relating to cost,

schedule and risk. The cost, schedule and risk information would be developed by the relevant expert – DMO

for military equipment estimates and appropriate Defence Groups for all other inputs to capability.

AGREED

• Weunderstandthatthepurposeofthissubmissionwouldbetoputmorediscipline,rigourand

an accountability framework around Defence’s internal consideration of capability proposals and

the entry of the project to the DCP.



• CCDG,inconjunctionwithCEODMOhasdevelopedastatementofthecapabilitydevelopment

process designed to clarify key roles and responsibilities, enhancing opportunities for the

Capability Managers and other stakeholders to be involved early in the process and to keep

Government better informed about key stages in capability development.

RECOMMENDATION 2.5 At entry into the Defence Capability Plan, a draft Materiel Acquisition Agreement should be developed

detailing the responsibilities and expectations of the stakeholders. This agreement should be refined

throughout the process as more information is gathered.

AGREED

• Agreedasperrecommendation2.4.

RECOMMENDATION 2.6 Capability Managers should be required to sign the capability submission acknowledging their understanding

of the capability being requested and the proposed acquisition strategy.

AGREED


RECOMMENDATION 2.7 DMO should be responsible for the equipment acquisition strategy throughout the requirements definition

process.

AGREED




RECOMMENDATION 2.8 Capability Development Group should be adequately resourced in terms of workforce numbers and skills

to develop capability proposals and incorporate specialist advice from DMO and the Defence Science and

Technology Organisation.

AGREED

• AppropriatetrainingremainsacriticalfactorinensuringthattheCDGworkforceisableto

undertakehigh-qualitycapabilitydevelopmentprojects.Weacknowledgeacontinuingneedto

deepen expertise in cost and schedule estimation and project management. Since the 2003

Defence Procurement Review Defence has invested substantial effort in developing appropriate

training programs for CDG and DMO staff. CCDG and CEO DMO will continue to explore how to

deepen our capabilities to improve this training.

• TheSecretaryandtheChiefoftheDefenceForce(CDF),supportedbyCCDG,theCapability

Managers and the Chief Defence Scientist (CDS) will determine an appropriate strategy

to manage workforce numbers to ensure that CDG is able to develop capability proposals

in a timely fashion and with the necessary levels of expertise. The validation of workforce

requirementsneedstotakeaccountoflikelyWhitePaperandPappasReviewoutcomesand

operate within the context of broader workforce pressures on Defence.

RECOMMENDATION 2.9 Capability Development Group and DMO should further develop their ability, and be adequately resourced to

accurately estimate the cost and schedule of major acquisition projects.

AGREED

• Agreedasperrecommendation2.8.Wewilllooktocreateopportunitiestoimproveandalign

cost estimation techniques and training in cost estimation between Defence, the DMO and the

Department of Finance and Deregulation. This will improve the level of common understanding

and reduce conflicts due to the employment of different methodologies.

• Animportantelementtoincludeinthisprocessistheimpactofnetpersonnelandoperating

costs (NPOC) to support new capabilities. The Vice Chief of Defence Force in his capacity as

the Joint Capability Coordinator, with the Chief of Joint Operations and the CFO DMO will be

engaged in developing and reviewing NPOC related aspects of major acquisitions.



• DMOwillberesponsibleandaccountablefordevelopingmilitaryequipmentcostandschedule

estimates and risk analysis and developing and implementing an acquisition strategy. DMO will

also be responsible for analysing industry’s capacity to deliver the required capability.

RECOMMENDATION 2.10 The Chief Executive Officer of DMO should provide independent advice to Government on the cost, schedule,

risk and commercial aspects of all major capital equipment acquisitions, and be a permanently invited

adviser to Government committees considering defence procurement.

AGREED

• WeagreethatCEODMOmustbeinapositiontoprovideadvicetoGovernmentonthecost,

schedule, risk and commercial aspects of all major capital equipment acquisitions. As the Review

points out, many parts of the Defence organisation bring professional expertise to bear on

procurement, including CDG, DSTO, CIO Group, the Defence Support Group (for estate matters),

the Capability Managers and the Services as the end-users. These views must be properly

reflected in the cabinet submissions which Defence prepares, and which the Minister for

Defence brings to the NSC. It would not be appropriate for DMO to make coordination comments

on Defence cabinet submissions because, for procurement matters, DMO is intimately involved

in preparing these submissions. Coordination comments are made by external agencies after the

Minister for Defence has approved the submission.4

• GovernmentmustbeassuredthatDMOandotherrelevantpartsofDefencehavebeenfully

and appropriately involved in producing cabinet submissions. The Deputy Secretary for Strategy,

Coordination and Governance will discuss with PM&C a distinctive way to present the advice

provided by DMO in the body of cabinet submissions to reinforce the provision of independent

advice.

• TheCabinetHandbookmakesitclearthatofficialscanbecalledtoattendCabinetmeetingsat

the request of the Minister (which could be in the form of a request for a blanket approval) and

with the approval of the Prime Minister. Agreement will be sought for the attendance of the CEO

DMO at all NSC meetings if capability acquisition decisions are being sought.

4 Cabinet Handbook (Fifth Edition) Paragraph 5.4.



RECOMMENDATION 3.1 To provide a firm baseline for the delivery of equipment, Capability Managers should sign the Materiel

Acquisition Agreements.

AGREED

• Thiswillhelptoconfirmtheagreedbaselinelevelsofcapabilityagainstwhichthedeliveryof

equipment will be measured.

• CCDGwillcoordinatethisprocess.

RECOMMENDATION 3.2 As a fundamental principle, oversight and coordination of all elements necessary for the introduction of a

capability should be exercised by the relevant Capability Manager.

AGREED

• WeagreethatCapabilityManagersshouldactinastrongerassuranceroletoensurethere

is appropriate oversight and coordination of all elements necessary to introduce a capability.

This will require a mechanism involving the DMO and many elements of the wider Defence

Organisation to meet at an appropriately senior level to provide such oversight.

• TheremaybetensionfromtimetotimebetweentheDMO’sabilitytodeliveracapabilitytoits

approved scope and/or schedule, and a Capability Manager’s judgement that this capability

can no longer meet his operational requirements (which may have changed since the original

approval). Such a judgement would have major implications for the achievement of value for

money for the Commonwealth, and would not be taken lightly. However, it is possible, and it

is incumbent on the Capability Manager to identify such issues and have them considered by

Government as soon as they become apparent. A deliberate decision on whether to proceed,

amend, or cancel the procurement would need to be made by the relevant Ministers, taking

into account the full range of issues involved. Capability Managers must include whole of

life implications and independent advice from the CEO DMO on the cost, risk and schedule

implications for projects in their advice to Government.

• CapabilityManagerswithCCDGandCEODMOwillmeettodiscussanappropriategovernance

structure.



RECOMMENDATION 3.3 Defence should implement a framework, through the Capability Managers, to coordinate all the inputs to

developing military capability.

AGREED

• Seetheresponseto3.2.

RECOMMENDATION 3.4 Capability Managers should report regularly to Government on the status of the capability development

initiatives for which they are accountable.

AGREED

WeagreethatCapabilityManagersshouldreporttoGovernmentthroughtheSecretaryandCDF,who

collectively have overall responsibility for capability development and for ensuring that the full range of

capabilities under development reflect an appropriate distribution of financial and human resources.

• Defencewillexploreoptionsforthemosteffectivewayforthisinformationtobereportedto

Government. One option is that this should be a chapter in the classified DCP.

RECOMMENDATION 3.5 For complex and demanding projects, the authority, responsibility and accountability of the Project Manager

should be formally set out in a project charter. Project Managers should be held to account for meeting the

financial and non-financial performance targets detailed in their charter.

AGREED

• CEODMOandCCDGaretoensurethatsuchaprojectchartersystemisquicklyputinplaceand

that specific approvals made by Government can be clearly traced to the charters.



RECOMMENDATION 3.6 An independent Project Performance Office should be established within DMO to review projects and assist

project teams to solve problems where necessary.

AGREED

• DMOhasanumberofmechanismsinplacedesignedtoprovidesuchanindependentreview

function and to assist project teams where necessary. For example, the organisation’s Assurance

BoardsformakeyelementoftheDMO’scorporategovernanceframework.TheBoardsprovide

independent assurance and advice on the adequacy of governance frameworks (including

controls, policy, processes and procedures) for each equipment acquisition and through-life

support activity; and on issues and risks involving schedule, cost, capability and sustainability.

TheBoardsaredesignedtopromotebestpracticeprojectandsustainmentmanagementby

ensuring that staff prepare for board reviews and are challenged by an independent board with

arangeofskillsandexperience.ThecompositionoftheAssuranceBoardsensuresthatthey

are in a position to cast a ‘fresh set of eyes’ across a project or sustainment activity. DMO Staff

areencouragedtousetheAssuranceBoardsas‘soundingboards’andtoseekguidanceand

feedback from the boards on any aspect of concern involving a project or sustainment activity.

• CEODMOwillestablishanindependentProjectPerformanceOfficefromwithincurrent

resources,drawingonthecurrentAssuranceBoardsandotherrelevantareasofthe

organisation.

• DefenceandDMOwillalsoinvestigatewithcentralagenciesandtheAustralianNational

Audit Office (ANAO) changes to the current project progress reporting arrangements aimed

at standardising and simplifying these reports. The US Selected Acquisition Report framework

provides a useful model and its adaptation for Australian use will be investigated.

RECOMMENDATION 3.7 DMO should continue to refine its approach to contracting so as to align with commercial practice. Contracts

should reflect the risks of the procurement being undertaken.

AGREED

• Defencewillcontinuetoworkwithindustrytorefinetheagreed‘sevenprinciplestoimprove

procurement practice.’ As a Commonwealth entity, DMO will continue to be bound by

Commonwealth Procurement Guidelines and the broader Government regulatory framework.



RECOMMENDATION 3.8 Public-private partnerships should be applied to defence procurement on appropriate projects. DMO should

evaluate all of the relevant issues and provide advice to Government on how best to implement public-private

partnerships.

AGREED

• DMOwillevaluatewhatcapabilitiesmightbesuitableforacquisitionunderpublic-private

partnership(PPP)arrangements.WenotethattheReviewindicatesDefencehaspreviouslyused

a number of PPP arrangements, including on facilities projects and the Special Purpose VIP

aircraft operated by the Air Force’s 34 Squadron.

RECOMMENDATION 3.9 Projects should be assessed for their potential as a public-private partnership as part of the acquisition

strategy developed by the DMO.

AGREED

DMO, in conjunction with key Defence stakeholders will add to project proposals an evaluation of the

potential for acquisition under a PPP arrangement.

RECOMMENDATION 3.10 The Government should work with industry and State Governments to address the skills shortage.

AGREED

• ThisisahighpriorityfortheGovernmentandDefenceasreflectedintheDMO-runSkilling

Australian Defence Industry (SADI) initiative. The SADI program is designed to train new skilled

industry personnel, up-skill existing personnel and improve the quality and increase the quantity

of training in defence industry overall. In late November 2008, the Government announced

spending of $61 million designed to boost skills in Defence industry.

• AmodelofthistypeofcooperativeactivitywiththeStatesisthe$20millionpackageof

initiatives announced by the Premier of South Australia and the Parliamentary Secretary for

Defence Procurement on 2 December 2008. This included funding to support industry skills



development through a Schools Pathway Program, a Professional Doctorates program, a Masters

of Systems Support Engineering and an expansion of the Masters of Military Systems Integration

scheme.

• On4DecembertheGovernmentalsoannounceda$26millionskillspackageforDefencesmall

and medium sized enterprises which included additional funding Defence Industry Innovation

Centers, an Engineering scholarships program and an expansion of the DMO Institute.

• Defencewillcontinuetolookforopportunitiestofurtherassistindevelopingessentialindustry

skills.

RECOMMENDATION 3.11 The Government should consider implementation of the recommendations of the Joint Industry Training Task

Force.

AGREED

• Seeresponsetorecommendation3.10

RECOMMENDATION 3.12 DMO staff development should be expanded to cover contractor management including influence,

negotiation and relationship management.

AGREED

• Providingtrainingofthistypehasbeenahighpriority.TheestablishmentoftheDMOInstitute

supported by the university sector has led to significant advances in the range and depth of

training offered to DMO staff and is helping to professionalise the DMO workforce. The DMO

Institute is responsible for the design, development and administration of training courses that

are aligned to the DMO job families. The DMO Institute provides innovative and contemporary

training courses that are aligned with work practices, and is a one stop shop for information

regarding professionalism, certification, training and development. Courses offered in

procurement and contract management also offer training in advanced negotiation skills.



• OnDecember4,2008theGovernmentannouncedthatitwoulddevoteupto$2.5millionto

extend access to DMO Institute training programs to Defence industry.

• DMOstaffwillfurtherexploreopportunitiestoexpandormodifycoursesaddressingcontractor

management influence, negotiation and relationship management.

RECOMMENDATION 3.13 Changes to the scope of projects should occur through a disciplined process that considers the merit of the

change mindful of the impact on cost and schedule.

AGREED

• Materialchangestotheapprovedscope,costorscheduleofmajorprojectswillrequirethe

further consideration of Government. The specific thresholds which should apply, and whether

these changes should be considered and approved or rejected by Defence, Two Ministers or

NSC, needs to be reviewed in consultation with the Department of the Prime Minister and

Cabinet and the Department of Finance and Deregulation. See also Recommendation 3.2.

• ThroughtheCapabilityManagers,Defencewilldevelopamoreformalisedprocesstoaddress

scope change. Any such process will need to be sensitive to the requirements for scope change

resulting from operational activities.

RECOMMENDATION 3.14 DMO should be held to account for delivering equipment and services as set out in the Materiel Acquisition

Agreements.

AGREED

• WeagreethisreflectsasoundapproachtoemphasisingDMO’saccountability.Tosupportthe

proposal the Capability Managers will identify ways in which to report how events or activities

outside of DMO’s span of control impact on the delivery of capabilities. One option would be to

address this in the Defence and DMO Annual Reports. The Defence-DMO charter, the Materiel

Acquisition Agreements and the redeveloped and clarified capability development process will

provide the transparency needed to ensure reinforced accountability.



RECOMMENDATION 4.1 Net Personnel and Operating Cost (NPOC) estimates should be updated annually as part of the budget

process.

AGREED

• WeacknowledgethatestimatingNPOChasbeenaproblemarea.Defencehasbeenworking

hardtofactorthiselementintoourcapabilitydevelopmentprocess.Webelievethatwewill

besubstantiallybetterpositionedafterthenewDefenceWhitePapertoaccountforourNPOC

requirements and to make this a robust part of our planning processes. This will be reflected in

the annual Defence Management and Financial Plan (DMFP).

• CCDG,CEO-DMO,VCDFandtheotherCapabilityManagerswillcontinuetoworkontheNPOC

taskwiththeaimofhavingarobustsysteminplaceforthe2009budgetandthereafteras

part of the capability development budget process. Our focus will be to apply annual updates to

projects that have an NPOC impact in the Defence Management and Finance Plan (DMFP).

• AkeypartofthischangewillbetheincorporationofNPOCprovisionsformajorcapital

equipment projects within the Defence Capability Plan.

RECOMMENDATION 4.2 DMO and Defence need to further develop the key performance indicators in Materiel Sustainment

Agreements and the systems needed to record sustainment performance and costs.

AGREED

• Weseethisasbeingavitaltaskandarecommittedtorefiningsustainmentkeyperformance

indicators. It is important to understand that sustainment is a critical factor supporting the

ADF’s capability to conduct operations. Sustainment supports the readiness levels of the ADF

which are in turn defined by the impact of strategic circumstances on Defence’s requirement to

mount operations. DMO is therefore an integral part of Defence’s capacity to undertake military

operations. This imperative, as well as the requirement for DMO to be more business-like, will

drive sustainment performance and costs.

• Sustainmentperformanceandcostswillalsobemeasuredinthecontextofthebroaderstrategic

reform program as Defence implements more effective ways to get work done and lowers input

costs.



• DMOandDefencewilltasktheCapabilityManagerstoundertakeastudytodevelopabetter

methodology for arriving at sustainment key performance indicators.

RECOMMENDATION 4.3 An independent Sustainment Efficiency Office should be created in DMO to measure, benchmark and find

ways to improve the efficient delivery of sustainment to the Australian Defence Force.

AGREED

• AsoutlinedintheresponsetoRecommendation3.6,DMOhasanumberofmechanismsin

place for the oversight and review of projects.

• InparallelwiththeproposalatRecommendation3.6ontheestablishmentofanindependent

Project Performance Office, the CEO DMO will establish an independent Sustainment Efficiency

Officefromwithincurrentresources,drawingontheAssuranceBoardsandotherrelevantareas

of the organisation. Defence will work closely with DMO to ensure that other critical areas of

sustainment support to the ADF (for example that provided by the Defence Support Group, the

Chief Information Officer and DSTO) will be closely engaged.

RECOMMENDATION 4.4 Decisions to either purchase new equipment or maintain existing systems should be based on the through-

life cost of each option regardless of whether the funding is from the acquisition or sustainment budgets.

AGREED

• ThisrecommendationsetsoutasuitableplanningprincipleandonethatDefencewill(and

does)seektoapplytocapabilitydevelopment.Whileausefulstartingpointtherealityisthatitis

difficult to have a precise understanding of the likely through-life cost of an item of equipment.

Heavy operational use may fatigue a military capability faster than anticipated. Equally, innovative

maintenance strategies or changes in the preparedness requirement may extend a system’s life

of type. A decision to replace equipment is also dependent on the state of technology and the

attractiveness of likely alternate systems. These complexities make it challenging to estimate

through-life cost with a high degree of accuracy. In cases where Defence may have a choice

between continuing with a current capability and acquiring a new capability we will ensure that

business cases are developed that make the government’s options clear in terms of cost and

capability.



RECOMMENDATION 4.5 Systems Program Office Directors should be empowered through greater delegation to deliver the

performance levels set in Materiel Sustainment Agreements and, where necessary, to negotiate changes with

Defence.

AGREED

• CEODMOwillgiveeffecttothisrecommendation,notingthatappropriateoversightmechanisms

will need to continue to ensure that broader Defence requirements are addressed. Giving the

SPO Directors more authority to negotiate changes with Defence will bring with it a requirement

to ensure that any changes to the Sustainment Agreements will take full account of ADF

preparedness and operational requirements.

• AllsuchchangeswouldbewithintheapprovalssetbyGovernment.Anyproposedchangesthat

exceed the limitations set by Government in the budget would need to be taken to Government

for consideration.

RECOMMENDATION 4.6 The authority, responsibility and accountability of the Systems Program Office Directors should be formally

set out in a product charter. They should be held to account for meeting the financial and non-financial

performance targets detailed in their charter.

AGREED

• Productcharterswillbedevelopedaspartoftheimplementationofrecommendation4.5.

RECOMMENDATION 4.7 The current functional split between Defence and DMO for warehousing, distribution and disposal should be

retained but responsibility for vehicle maintenance should be returned to DMO.

AGREED IN PART

• WeagreethatthecurrentfunctionalsplitbetweenDefenceandDMOforwarehousing,

distribution and disposal should be retained; however the question of vehicle maintenance needs

to be studied further before any structural change is made.



• Weagreethattheremaybeastrongcasetomoveresponsibilityforvehiclemaintenanceto

DMObutitwilltakesometimetodevelopabusinesscaseexploringtheoptions.Wewilltask

the Vice Chief of Defence Force, who is responsible for the Joint Logistics Command, to review

with CEO-DMO the most effective means for Defence to perform vehicle maintenance. This

review will need to balance operational and preparedness requirements with the need to ensure

a cost effective approach and to ensure that the principles of transparency and accountability

arefullyapplied.ThereviewwillalsodrawontheworkoftheDefenceBudgetAuditTeamwhich

addresses ways to improve efficiency, including in the vehicle maintenance area.

RECOMMENDATION 4.8 BusinessimprovementshouldcontinueinDefenceandDMOtoincreasethevisibilityofcostsdueto

warehousing, freight and disposal, and to reduce the costs of inventory storage and distribution.

AGREED

• AstheReviewacknowledges,Defencehasinvestedsubstantialeffortin2008toremediate

itswarehousing,freightanddisposalstrategies.Weareintheprocessofdisposingoflarge

numbers of obsolete items and will implement new strategies which are currently being finalised

inacompanionreviewtotheWhitePaper.Weexpectthatournewapproachtowarehousing

will produce savings and, importantly, will increase the visibility of costs to DMO and the wider

Defence organisation.

RECOMMENDATION 5.1 DMOshouldbecomeanExecutiveAgencyunderthePublicServiceAct1999,andretainitsPrescribed

AgencystatusundertheFinancialManagementandAccountabilityAct1997.

NOT AGREED

• Wedonotsupportthisproposal.OurassessmentisthatmakingDMOanExecutiveAgencyas

well as a Prescribed Agency would weaken Defence’s capacity to conduct operations; undermine

the CDF’s statutory authority for command of the ADF, and the Secretary’s statutory authority for

administration of Defence; entail potentially significant costs to separate DMO from Defence, and

in isolation would not achieve a cultural transformation to make DMO more business-like. Our

assessment is that the debate over Executive Agency status has focussed too narrowly on just

one of what is a number of options for bringing about change in DMO.


• Impact of making DMO an Executive Agency.Section65ofthePublicServiceAct(1999)

allows for the establishment of Executive Agencies. The head of the Executive Agency would

become directly responsible to the agency Minister and would be directly accountable to the

Government and Parliament in the same way as the Secretary of a Department. The Australian

Public Service Commission says that “the purpose of the executive agency structure is to

provide a degree of separation from departmental management where that is appropriate to the

functions of the agency and something less than a statutory authority is warranted.” 5 It should

be noted that as an Executive Agency DMO would still be bound by the Public Service Act for all

matters including recruiting and be accountable through the Minister for Defence to Government

and Parliament. There are currently five agencies in the Commonwealth which are both

Executive and Prescribed Agencies.6 As can be seen from the table below these agencies tend

to be small and have largely autonomous functions. Their output does not form an essential and

unique contribution to the performance of a Department of State. Given its scale and complexity,

the DMO would sit at odds with this group of agencies.

Commonwealth Prescribed and Executive Agencies

Agency Annual Budget

$ million Staff (FTE)

National Capital Authority (Old Parliament House) 59,955 51

Insolvency and Trustee Service Australia (ITSA) 71,624 280

National Archives of Australia 147,205 397

CrimTrac 149,359 156

BureauofMeteorology 334,320 1,295

Source:PortfolioBudgetStatements2008-2009

Annual Budget Staff $ million (FTE)

Defence Materiel Organisation 10,669,838 7,634


• ConductofOperations.BecauseofitscentralroleinsustainingcurrentADFcapability,DMO

plays an essential part in Defence’s capacity to conduct operations. The Mortimer review

notes that through-life maintenance and support accounts for more than half the DMO annual

5 http://www.apsc.gov.au/apsinduction/demonstration/content/referencesuite/glossary.htm

6 http://www.finance.gov.au/financial-framework/fma-legislation/fma-agencies.html



budget and about two-thirds of its workforce. Through rapid acquisitions designed to support

operations DMO procurement also provides an essential enabling capability to the ADF. Having

broughttheprocurementandsustainmentarmsofDefencetogetherinthe1990s,withthe

benefit of significant efficiencies and savings, our assessment is that it would be damaging

and economically costly to separate Defence from the procurement and sustainment functions

providedbytheDMO.WeareconcernedthatmakingDMOanExecutiveAgencywouldlessenits

requirement – and its current cultural predisposition – to be responsive to operational needs.

• TheSecretaryandCDF’sstatutoryauthority.TheDefenceAct(1903)placesstatutoryauthority

on the CDF for the command of the Defence Force and to the CDF and Secretary jointly for

the administration of the Defence Force.7 Although this authority can be delegated they are

ultimately responsible to Government for all aspects of Defence including those conducted by

DMO. At the least the establishment of DMO as an Executive Agency would complicate this

matter. DMO is a fundamental enabling element for operational capability and therefore a key

component of the CDF’s capacity to command operations.

• CostsofseparatingDMOfromDefence.DefenceandDMOadministrativestructuresare

completely interlinked with Defence providing the substantial ICT, finance, human resource

and other forms of administrative support. Equally, DMO provides a number of functions to

Defence, for example advice on contract management, so there would also be a requirement for

Defence to duplicate some capabilities within a split structure. For an organisation of DMO’s size

there may be potentially significant additional cost implications that are yet to be quantified of

having to build its own ICT, finance, human resource, estate and broader administrative support

capabilities.

• AchievingaculturaltransformationinDMO.TheMortimerreview’sultimatepurposeisto

give the CEO DMO the authority to bring about a deep cultural change in DMO, to make the

organisation more business-like and to do so by making it more separate from the broader

Defence organisation. In our assessment the review’s finding that the creation of an Executive

Agency will achieve this goal does not fully address the challenges associated with achieving

cultural change. Even as an Executive Agency DMO will be required to operate under the Public

Service Act, which will constrain its degree of independence. Although it is imperative that DMO

becomes more business-like, its culture needs also to comprehend the organisation’s role as

an enabler of military operations and also as an entity that is accountable to Government and

Parliament.

7 TheDefenceAct(1903)http://www.austlii.edu.au/au/legis/cth/consol_act/da190356/index.html#s9a



RECOMMENDATION 5.2 To effect this change a charter should be drawn up between Defence and DMO which would clearly spell

out the responsibilities of each agency. The charter should include provision for the Chief Executive Officer of

DMO’s continuing membership of the Defence Committee.

AGREED

• Notingourpositionwithregardtorecommendation5.1,weagreethatacharterbetweenDMO

and Defence would be an essential instrument to clarify roles, authorities and responsibilities; to

codify the instruments that will enable cultural change in DMO; to set appropriate benchmarks

and measures of performance and to institutionalise the more demanding requirements of

transparencyandaccountability.Wewill,therefore,developsuchacharter,withCEODMO

and defence working closely over the next few months to have such a document ready for

GovernmentconsiderationbeforeJune30,2009.

• CEODMOwillremainamemberoftheDefenceCommitteeandDMOseniorofficerswillremain

members of subordinate committees.

RECOMMENDATION 5.3 It should be mandated that the Chief Executive Officer of DMO must have significant private sector and

commercial experience.

AGREED

• WeconsiderithighlylikelythatfutureCEOofDMOwillhavesignificantprivatesectorand

commercial experience. Selection processes must, of course, be open to selecting the best

possible candidate in keeping with the merit principle of the Australian Public Service. Our

preference would be to select on the basis of candidates having demonstrated substantial

commercial and business acumen.



RECOMMENDATION 5.4 Acquisition funding should be directly appropriated to DMO on the basis of a budget submission from DMO

outlining anticipated major capital equipment project expenditure.

AGREED IN PART

• Directappropriationsformajorcapitalequipmentcouldactasausefulcatalysttogeneratea

stronger business-like focus in DMO. The implications of this recommendation are, however, far

reaching and complicated. They need to be studied carefully to ensure that financial handling

issues are worked through, a suitable transition strategy developed and mechanisms put in place

to ensure that our accounting treatment of capital and related expenditure is fully transparent.

• Bymid-2009DefenceandDMOproposetopresentastrategyonhowthisrecommendation

could be implemented, should Government choose to do so. This will involve working very closely

with key central agencies such as the Department of Finance and Deregulation, Treasury and the

Department of Prime Minister and Cabinet. Should Government agree it, the strategy would allow

for a transition to this funding model from the 2010-11 Financial Year.

• Keyelementsofthisstrategymustinclude:

+ A mechanism to determine how to split project funding in projects so that DMO is

appropriated for its elements (mainly equipment) and Defence for its components (mostly

facilities, research and development, and sustainment).

+ A plan to apply this splitting of funding to the remaining spends of existing approved projects

and for all future projects as they come forward for approval.

- This would require action to separate past and future projects into anticipated Defence

and DMO cash streams, including a share of contingency.

+ A methodology to share contingency costs between Defence and DMO and agreed business

rules on how and when to access contingency costs.

+ An agreed set of business rules allowing the splitting of DMO and Defence balance sheets

for major capital acquisition.

+ DMO would not only receive the cash in-year for acquisition, but would hold the future

anticipated appropriation stream across the forward estimates and DMFP for both approved

and DCP projects.

- The option of Defence reflecting future-year anticipated appropriations for DCP projects

will be explored with central agencies.

- An issue to be resolved is the handling of in-year cash for DCP projects that are expected

to be approved after the budget. The logical approach would be for this funding to be

included in the DMO appropriation.



+ A mechanism to seek Government approval to reprogram funding across years if Defence/

DMO considered that the projected cash flow did not match requirements.

+ A mechanism to seek Government approval to move future funding streams into the Defence

StrategicInvestmentReserve(DSIR).WhatisatpresentaprocessinvolvingMinisterial

approval for transfers within the Defence budget would become a Cabinet decision across

agenciesataBudgetmilestone.

+ Withdirectappropriationthetransferofcashinthecurrentyear(if,forexample,DCP

projects expected to be approved in-year after the budget did not proceed), will require an

adjustment to appropriations agreed by Government at a budget milestone.

+ Direct appropriation will often elevate decisions to Cabinet or Ministerial level to make

decisions about the split of allocations between two separate organisations. In some

respects this may add to Ministerial workloads, although it will be possible to develop a set

of general principles through which the Government provides guidance on handling financial

interactions between Defence and DMO.

+ A plan will need to be developed to define the treatment of inventory and the transfer of

assets (for example spare parts) between Defence and DMO. An important objective will be

to ensure that such transfers can be easily tracked for audit purposes.

+ Agreements with the ANAO and the Department of Finance and Deregulation that the budget

arrangements are appropriate and provide the transparency and accountability mechanism

that Government requires.

RECOMMENDATION 5.5 Sustainment funding should continue to be provided through Defence to DMO, but Service Fee funding

should be appropriated directly to DMO. The Service Fee should be based on anticipated workloads.

AGREED

• WeagreethatServicefeefundingcanbedirectlyappropriatedtoDMO.Thiswillrequirecareful

elaboration of appropriate business and accounting rules to ensure that risks and benefits are

shared between Defence and DMO. There will be a need to balance mutual requirements with

regard to fluctuations in demand for civilian and military personnel numbers.

• Directappropriationwillshiftthebalanceof‘control’infuture-yearplanningfromDefenceto

DMO – as DMO would ‘own’ the money in the forward estimates when negotiations occur on the

provision of ADF staff placements.



• DefencewillreviewitsstaffinglevelsinDMOanditspostingarrangementstoensurethat

the level of military staffing to which it commits can be delivered (other than in exceptional

circumstances). Mechanisms will be established to provide incentives on the Services to deliver

agreed workforce levels. Mechanisms are needed to ensure that where DMO is provided with the

agreed workforce it will deliver the level of output agreed, as slippage in outcomes will result in a

net increase in staff costs in future years.

RECOMMENDATION 5.6 Government should set a target for no additional funds for real cost increases on major capital acquisition

projects beyond approved changes to scope (or other legitimate reasons for a cost increase). This will be

contingent on the Chief Executive Officer of DMO achieving the necessary independence and flexibility as

provided by an Executive Agency to run the business.

AGREED

• Ourassessmentisthatthisrecommendationreflectsanecessaryobjectiveandindeeddoes

reflectcurrentpracticewithregardtohowcostincreasesareevaluated.Wedonotagreethat

it would be necessary to make DMO an Executive Agency in order to implement this approach

to cost increases. In order to facilitate the Government’s handling of this issue we will improve

Defence and DMO’s reporting to allow greater transparency to the sources of real cost increases.

RECOMMENDATION 5.7 TheDefenceProcurementAdvisoryBoard(DPAB)shouldcontinue,withthecurrentpublicsector

membership, with an increased focus on providing advice to the Chief Executive Officer of DMO.

AGREED

• Weagreewiththeintentofthisrecommendation.TheDPABhasbeenavaluablesourceof

advice to Defence and DMO since its inception in 2003.

• In2009,Defencewillembarkonabroadprogramofstrategicreform,whichwillbe

accompanied by the development of a robust governance and assurance framework, including

theproposedestablishmentofaStrategicReformAdvisoryBoard,whichwoulddrawits

membership from both the public and private sector.



• Thiswouldbechairedbyapersonfromtheprivatesectorwiththeappropriateskillsand

experience to advise on a significant reform program in a large and complex organisation.

IfagreedbyGovernment,theBoardwouldcompriseanappropriatebalanceofinternaland

external members, including the Secretaries of the Departments of the Prime Minister and

Cabinet, the Treasury, Finance and Deregulation and Defence, the Chief of the Defence Force

and the CEO DMO. To ensure that strategic reform is pursued on a whole of portfolio basis, the

BoardwillencompassthefunctionsoftheDPABasdescribedintheMortimerReview.

RECOMMENDATION 5.8 Defence should manage its relationship with DMO in terms of costs and delivery against performance levels.

AGREED

• WewillusetheCharterdescribedinrecommendation5.2tosetthebasisforamanagement

focus on costs and delivery against performance levels. The Capability Managers will play a

key role in ensuring that the focus on cost and delivery is at the heart of the DMO-Defence

relationship.

RECOMMENDATION 5.9 The Chief Executive Officer of DMO should have greater flexibility to manage the organisation’s workforce

including control over appointments, remuneration and performance management.

AGREED

• TheSecretaryofDefencehasdevolvedawiderangeofHumanResourcerelatedpowers

and functions to the CEO DMO under the Public Service Framework, the Defence Collective

Agreement2006-2009(DeCA2006-2009)thatcoversemployeesatExecutiveLevel2(EL2)

andbelowandtheWorkplaceRelationsAct,1996whichcoverallemployees,includingthosein

the Senior Executive Service (SES).

• ThismeansthatCEODMOmayexercisethesepowersinhisownright,andasfirstdelegate

maydevolveanyofthosepowerstoothersinDMO.Whenadelegatewhoholdsthepower

has made a decision properly, it is final. The broad suite of powers devolved to CEO DMO

provides a high degree of autonomy to enable him to govern DMO to achieve identified business

outcomes, and to provide him with flexibility on employment matters. The powers also give CEO



DMO autonomy to resolve all performance issues. Specifically, he is able to make decisions

on remuneration through subsection 24(1) Public Service Act determinations for SES officer

employment and to facilitate specific arrangements for employees with specialist skills.

• TheSecretaryofDefencehasastewardshipresponsibilityastheDefencePortfolioHeadto

ensure that APS Values and the Public Service Act are complied with across the portfolio. In this

respect, the Secretary will be kept informed of SES employment decisions and receive from CEO

DMO an annual stewardship report covering the DMO workforce that will enable the Secretary to

confirm that the DMO is upholding APS Values and complying with the Public Service Act. This in

no way diminishes CEO DMO’s authority to exercise decision making within the DMO workforce.

• ThesearrangementswillbecodifiedinaletterfromtheSecretaryofDefencetoCEODMO.

RECOMMENDATION 5.10 A new General Manager – Commercial position should be created in the DMO at the Senior Executive

ServiceBand3level,tomanagestrategiccommercialissuesandacquisitionstrategy,tosupporttheChief

Executive Officer of DMO achieve a more business-like focus throughout the organisation, and to improve the

performance of DMO business areas, with the broad responsibilities and role identified in this report.

AGREED

• CEO-DMOwillberesponsibleforundertakingarecruitmentactionforthepositionofGeneral

Manager Commercial.





SECTION 3

IMPLEMENTATION OF PROCUREMENT REFORM OUR IMPLEMENTATION PLAN FOR DEFENCE PROCUREMENT REFORM WILL FOLLOW THESE SIX STEPS: 1. INTERDEPARTMENTAL WORKING GROUP – DEFENCE CAPABILITY

The Government will establish a standing working group to engage central agencies earlier on Capability

Development proposals prior to submission to Secretaries Committee on National Security. The group will

operate along the same principles as the Strategic Policy Coordination Group (SPCG) ensuring early and

close coordination between agencies and helping to streamline the NSC workload. The working group will

monitor our implementation of procurement reform.

2. 3-STAR IMPLEMENTATION STEERING GROUP

Jointly chaired by the Chief Capability Development Group and CEO DMO, a 3-Star Steering Group will be

established to provide oversight of the implementation of the Mortimer Review recommendations. The Group

will comprise CCDG, CEO DMO, DMO’s General Manager Commercial, VCDF and the CFO. The Steering

Group will report to the Secretary and CDF on progress of the implementation program against agreed

timelines and deliverables to Government.

3. PROGRESS REPORTS

The Defence Organisation will provide regular reports to Government on the progress of the implementation

program. These will be linked to reporting on Defence’s Strategic Reform Program.

4. AUSTRALIAN NATIONAL AUDIT OFFICE (ANAO) AUDIT OF IMPLEMENTATION

The ANAO will be invited to audit the progress of reform at nine and eighteen months post-commencement

and report its findings against the agreed plan to make defence procurement more business-like.



5. AUDIT OF CONTINGENCY FUND AND MANAGEMENT RESERVE

Defence and DMO will request Auditor-General and the Department of Finance and Deregulation to provide

advice on accounting for contingency funding, management reserve and project slippage. This will be

included in the annual Defence Financial Statements.

6. INVIGORATION OF THE DEFENCE PROCUREMENT ADVISORY BOARD

TheDPABwillfunctionasdescribedintheMortimerReviewReportwillbeincorporatedintothetermsof

referencefortheDefenceStrategicReformAdvisoryBoardtobeestablishedtooverseethebroaderStrategic

Reform Program in Defence.






THE MORTIMER

REVIEW

www.defence.gov.au

THE RESPONSE TO THE REPORT OFTHE DEFENCE PROCUREMENT AND

SUSTAINMENT REVIEW

DPS: JAN024/09

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